The Drivers of Direct Commercial Real Estate Returns: Evidence from South Africa

Abstract

The purpose of the study is to investigate the determinants of direct real estate returns in South Africa. Literature review is conducted to identify factors that drive direct commercial real returns in other countries and the identified drivers are tested for relevancy in the South African (SA) market. The study applies SA annual commercial real estate returns including total returns, rental growth and capital growth published by the International Property Databank (IPD) over the past 20 years, from 1995 to 2014, as an independent variable. The study finds that vacancy returns, operating expenses, unemployment rates, inflation rates, GDP and interest rates all have an effect on real estate returns. However the most dominant and significant factors that explain total returns across all property types and provinces in South Africa are unemployment rates and interest rates. Our study finds key differences between the determinants of total return and change in capital values which are different from the variables which determine rental growth.

These results are important for asset managers as well as government regulatory agencies to make better informed decisions in relation to factors which affect direct real estate returns in an emerging economy.

Keywords: Direct Real Estate, Returns, Macro-Economy, Africa, Emerging Markets

JEL Classification: R1, R3